Overview - Neutral

OPPORTUNITIES

The overall metals industry structure is rather concentrated, with a few producers making a high proportion of sales. There is higher consumption of metals in the Asia-Pacific region, especially China and India. This is due to per capita consumption rising towards U.S./European levels, which could theoretically double metals demand in these regions in the longer-term.

There are vastly improved balance sheets with solid liquidity, which is starting to create some merger and acquisition activity, as it is cheaper to buy assets than mine for them. Production cuts of up to 35% are occurring to keep operating rates in the low-80s and keep the market balanced. As of now, this has not had significant positive impact, but it may have kept the market from being worse that it already is.

WEAKNESSES

Prices have peaked due to the record commodities run-up and also by slowing economies. Prices are falling in recent months. The slowdown in the U.S./Europe/Japanese economies remains a negative issue facing producers. Shipments are off at a double-digit rate. Pension deficits are rising due to lower interest rates, a weak stock market and less funding. Gold prices are staying at the $900/oz level, but we remain bearish on gold due to the following:

1) An increase in stock offerings - Both Newmont (NEM) and Kinross Gold Corp. (KGC) have announced sizable stock offerings in recent days. They know when the gold market and their stocks have peaked.

2) Slowdown in the Indian economy - GDP growth has slowed from 9% to 5% (and falling) in India. Nearly 45-50% of world production is consumed in India. That's right - not the US, Japan, Europe or China -- but India. Gold is a luxury item in this rapidly slowing economy, and the slowing is most rapid in large cities where gold is consumed the most.

3) Gold has no value and has spiked recently - It is just another metal like copper and lead. Its luster is in name only. It is economically sensitive. Most, if not all, other commodities have collapsed in recent months. Gold historically has correlated with oil, which has collapsed, as we all know.

4) A slow growth, low inflation, strengthening USD? and low interest-rate environment - This is the worst-case scenario for the gold market. Most of this is happening now. Central banks will take interest rates worldwide to zero. The USD will strengthen due to its safe haven status and rising confidence in President Obama. Inflation is non-existent. Worldwide GDP growth is low, but not negative.

5) Central banks - They need to finance deficits and bailouts by selling gold.

6) The amount of gold mined could increase with high prices - There is incentive to mine gold. Cash costs are in the $400/oz. range with prices near $1000/oz.

BUY/SELL RATINGS

DRD Gold (DROOY) is a Buy due to high gold prices, strong free cash flow and an improving balance sheet. Harmony Gold (HMY) is a Buy due to high gold prices, closing high cost mines and lowering its debt level.